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Overview of the course of business

Macroeconomic conditions

In 2008, growth in the German economy was considerably weaker than in the two previous years. Real (price adjusted) gross domestic product (GDP) rose by 1.3% in Germany (previous year: 2.5%). After adjustment for the negative calendar effect – the period under review had 2.7 more working days than the preceding year – the rise in GDP was 1.0% for 2008 (2007: 2.6% after adjustment for the calendar effect).

Although the German economy is still developing positively, this is attributable exclusively to the domestic economy.

In 2008, the domestic economy retained the momentum of previous years. Investments in construction and capital goods expanded fairly rapidly. In contrast, private consumption, the most substantial component of GDP, barely attained the level of the previous year (-0.1%). At 11.4%, the savings rate reached its highest value since 1994 (2007: 10.8%).

Exports, which had driven growth in the three previous years, slowed economic growth. The main reason for this was the considerably lower rise in foreign demand compared with previous years combined with the continued trend towards imports in the Germany economy. Hence, although German exports increased by 3.9% in 2008 (2007: +7.5%), imports rose by 5.2% after adjustment for prices (2007: +5.0%).

The average rate of inflation for the year was above that of the previous year (2.3%) at 2.6%. This was the highest annual increase since 1994. In particular, energy (+9.6%) and food prices (+6.4%) drove prices sharply upwards in the first quarters of 2008 and caused the average rate of inflation for the year to rise.

On an annual average, the unemployment rate fell to 7.8% (previous year: 9.0%); 3.27 million people (previous year: 3.78 million) were out of work. This significant, renewed, decline in unemployment primarily reflects a cyclical increase in employment liable to social security contributions.

In 2008, the European Monetary Union (EMU) continued to experience the economic boom of the preceding years, albeit to a lessened degree. According to the Statistical Office of the European Communities (Eurostat), real GDP increased by 0.9% in 2008 (previous year: 2.9%) in the EU- 27. The euro zone inflation rate rose significantly in 2008 (+3.7%; previous year: +2.3%) and unemployment increased slightly to 7.5% (2007: 7.4%).

Gross domestic product in Germany (after adjustment for prices) (Graphic)

Economic conditions in the industry

Retail sector

According to provisional figures from the Federal Statistical Office, in 2008 German retail sales rose by 2.1% in nominal terms while falling by 0.4% in real terms (after adjustment for prices). At €399.6 billion, sales in the retail sector in the narrower sense (excluding vehicle sales, service stations, fuels and pharmacies) were slightly up on the previous year (€395.3 billion). Thus the retail sector showed itself to be fairly robust in 2008 as the crisis sentiment closed in.

The non-food sector increased its sales in 2008, including after adjustment for prices. In contrast, food retailers suffered declines in revenue in real terms. According to the Hauptverband des deutschen Einzelhandels (HDE - German Retail Federation), one reason for this was the sharp increase in the price of food and semiluxury foodstuffs in the first three quarters.

Handelsverband BAG (German Retail Trade Association) observed that retail space throughout Germany increased by 1.3 million m² in 2008, although this represented a lower increase than in the previous year. This mainly took place in the first half of the year. As of late summer/autumn, BAG noted a tangible decrease in the reporting of new retail space. The implementation of many retail projects was either postponed or abandoned completely. Including the new additions, large-scale retail space in Germany amounts to approximately 117.8 million m².

According to BAG, this increase in retail space was primarily attributable to shopping centers, food and textiles discounters and specialty stores. Only a slight rise in retail space was recorded in east Germany, where new additions to space were offset by discontinued use of space in many cases. Once again, a certain non-typical development was observed in Berlin, where a large amount of new retail space has been created over the last few years. For the most part, the additions are in the west German states, where retail space has grown by around 1 million m² every year since 2006.

According to a survey by Kemper’s Jones Lang LaSalle, a consultancy firm specialising in retail property, the highest proportion of floor-space in leases in 2008 was attributable to textile and shoe retailers, at 41% and 9% respectively, and to bookshops, telecommunications service providers, chemists and accessory retailers, at 6% each. Other important sectors in prime locations were restaurants, banks, sports shops and retailers of luxury products.

Retail spaces in the 100 m² to 250 m² size category were the most sought after in the past year. Larger spaces were also in demand: every fourth lease was for over 500 m².

Real estate market

According to a survey by Jones Lang LaSalle, the transaction volume for investments in retail property on the European continent (shopping centers, retail parks and factory outlets; excluding UK and Ireland) fell to €12.4 billion in 2008, a decline of 56% compared with the previous year (€28.2 billion). A significant reason for this development is certainly the wait-and-see attitude of investors, who are having to accept less favourable financing terms owing to the global financial crisis.

With a 55% share of the transaction volume, in 2008 shopping centers continued to be the focus of investors in mainland Europe, who are increasingly seeking defensive investment opportunities. They prefer stable market segments and favour prime locations, secure, long-term leases and high-quality tenants. However, the transaction volume for shopping centers also fell by almost 60% in Germany to €1.1 billion (2007: €2.6 billion).

However, the German market maintained its leading position with respect to retail property investments in continental Europe. At €2.5 billion, the volume in Germany represented a share of 20% (2007: 26%).

The yields from retail property increased over the course of the year due to the credit crisis. Nevertheless, the low number of transactions makes pricing in line with market rates more difficult. In addition, in individual cases investors are prepared to continue to pay higher prices and thus to accept lower yields. At the end of 2008, the yield generated by German shopping centers in prime locations as calculated by Jones Lang LaSalle was 5.75% (2007: 4.50%).

Share price performance

Deutsche EuroShop shares began 2008 with a price of €23.50. On 13 May, they reached their high for the year of €28.40 on the basis of the Xetra closing price. As of early October, the intensifying international financial crisis sparked off a flurry of at times frantic share selling on the capital markets, affecting real estate companies in particular. Our shares were not able to extricate themselves from this negative pull and the price fell to €18.50 by 20 November. Thanks to a strong recovery phase in December, Deutsche EuroShop shares escaped the generally poor sentiment for financial and property shares to some extent and closed the year on a positive note at a price of €24.30.

Evaluation of the financial year

The Executive Board of Deutsche EuroShop is very satisfied with performance in the past financial year. Thanks to the good development of the business, to which the recently opened centers in Poland (opened in 2007), Hameln and Passau made a substantial contribution, we raised our forecasts in November 2008.

Revenue was planned at between €113 million and €115 million and totalled €115.3 million as of the balance sheet date (2007: €95.8 million), corresponding to an increase of 20%. Earnings before interest and taxes (EBIT) of between €93 million and €95 million was planned; ultimately it increased by 25%, amounting to €98.1 million (2007: €78.5 million). We expected earnings before taxes (EBT) excluding measurement gains/losses of between €45 million and €47 million. They rose by 29%, totalling €49.9 million (2007: €38.9 million).

Just as in the previous year, we exceeded revenue and earnings forecasts. Deutsche EuroShop has proven once again that it has an outstanding shopping center portfolio and is well positioned, even in these difficult times for the economy and the real estate markets.

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